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Republic Svcs. Misses on Both Lines

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Republic Services’ (RSG - Analyst Report) third-quarter 2012 adjusted earnings were 47 cents per share, missing the Zacks Consensus Estimate of 49 cents and also behind the year-ago adjusted earnings of 53 cents.

Adjusted earnings excluded 5 cents per share, pertaining to negotiation and withdrawal costs in the reported quarter. Adjusted earnings in the year-ago quarter excluded 1 cent per share pertaining to extinguishment of debt. Including these items, earnings were 42 cents per share in the quarter, compared with the year-ago earnings of 52 cents.

Total revenues decreased 3.3% to $2.047 billion, lagging behind the Zacks Consensus Estimate of $2.115 billion for the quarter. The decrease in the top line was attributable to reduction of 0.4% in fuel surcharge, 2.1% in volumes and 2% in recycling commodities pricing, partially offset by inflationary effect of core prices of 1% and acquisitions (net of divestitures) of 0.2%.

Operational Update

Cost of operations rose 1.6% to $1.28 billion. Selling, general and administrative expenses declined 6.6% to $193.8 million in the quarter.

Adjusted operating income dropped 15.7% to $349.4 million. Consequently, adjusted operating margin contracted 250 basis points to 17.1% in the reported quarter.

Segment Performance

Total revenues from the Collection segment increased 0.5% to $1.58 billion. Residential collection revenues rose 0.7% to $542 million. Commercial collection revenues increased 1% to $632.4 million. Meanwhile Industrial collection revenues fell 0.4% to $395.9 million in the quarter and Other collection revenues decreased 1.2% to $8.4 million in the quarter. The Transfer segment revenues dipped 10% year over year to $101.3 million.

Financial Update

Cash and cash equivalents were $74 million as of September 30, 2012, compared with $66.3 million as of December 31, 2011. Long-term debt excluding current maturities amounted to $7.06 billion as of September 30, 2012, compared with $6.89 billion as of December 31, 2011.

Cash from operating activities was $1056.7 million for nine months ended September 30, 2012, compared with $1,286.8 million for nine months ended September 30, 2011. Adjusted free cash flow was $479.7 million for nine months ended September 30, 2012, versus $701.3 million for first nine months ended September 30, 2011.

Share Repurchase

Board of Directors approved share repurchase up to $750 million through December 31, 2013. This was in addition to the previous repurchase program of $400 million authorized in November 2012. During the quarter Republic Services repurchased 1.3 million shares for $35.7 million at weighted average cost of $28.32.

Outlook

Adjusted earnings are projected to lie in between $1.85-$1.87 per share, down from the previous guidance of $1.91-$1.93 per share in 2012. The company expects adjusted free cash flow of $775 million, down from the earlier guidance of $775 million. For 2013, adjusted earnings are expected to be in the range of $1.90-$1.92 per share.

Our View

Republic Services intends to invest roughly $30 million in restructuring of field as well as corporate operations to reduce selling, general and administrative expenses approximately by $23 million annually. The company will incur half of the expenses in the fourth quarter of 2012, contracting margins in the quarter.

Moreover, margins remain constrained as Republic Services has more exposure to Collection services and less to Disposal services. Typically, the Disposal services generates the highest margins and the Collection services generates the lowest margin.

Republic Services faces competition from Waste Management, Inc. (WM - Analyst Report). The company retains a short-term Zacks #4 Rank (Sell). We have a long-term Underperform recommendation on the stock.
 

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